Morgan Stanley Settles for $2.6 Billion - but What Exactly Did They Do?

Morgan Stanley has agreed to pay a $2.6 billion Settlement Settlement Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 business days or T+2 after the trade is executed, and for listed options and government securities it is usually 1 day after the execution. Conversely in Europe, settlement date has also been adopted as 2 business days settlement cycles T+2.Settlement ExplainedA settlement is also the process of the payment of an outstanding account balance, an open invoice or charge. The electronic settlement system is a relatively new construct that has only become a standard in the past thirty years.For example, in real estate finance, you have settlement when the funds are accepted, and the deed to the property is traders to the new owner. Settlement can also mean an adjustment or agreement reached in matters of finance or business. For example, we have settled with the bank or the credit card company. A number of risks arise for the parties during the settlement process. These are effectively managed by the process of clearing, which follows trading and precedes settlement. By extension, clearing involves modifying those contractual obligations so as to facilitate settlement, often by netting and novation. Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 business days or T+2 after the trade is executed, and for listed options and government securities it is usually 1 day after the execution. Conversely in Europe, settlement date has also been adopted as 2 business days settlement cycles T+2.Settlement ExplainedA settlement is also the process of the payment of an outstanding account balance, an open invoice or charge. The electronic settlement system is a relatively new construct that has only become a standard in the past thirty years.For example, in real estate finance, you have settlement when the funds are accepted, and the deed to the property is traders to the new owner. Settlement can also mean an adjustment or agreement reached in matters of finance or business. For example, we have settled with the bank or the credit card company. A number of risks arise for the parties during the settlement process. These are effectively managed by the process of clearing, which follows trading and precedes settlement. By extension, clearing involves modifying those contractual obligations so as to facilitate settlement, often by netting and novation. Read this Term to the US Department of Justice over the firm’s creation and sale of residential mortgage-backed securities, leading to the 2008 financial crisis.

The settlement is another one in a long string of regulatory steps taken against the company over similar allegations. Last year the firm settled with the Federal Housing Finance Agency for $1.25 billion over accusations that the bank sold faulty mortgage-backed securities to Fannie Mae and Freddie Mac.

The company reached a similar settlement in July for $275 million with the Securities and Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectively relevant with real-time pricing.Depending upon where you reside, an exchange may be referred to as a bourse or a share exchange while, as a whole, exchanges are present within the majority of countries. Who is Listed on an Exchange?As trading continues to transition more to electronic exchanges, transactions become more dispersed through varying exchanges. This in turn has caused a surge in the implementation of trading algorithms and high-frequency trading applications. In order for a company to be listed on a stock exchange for example, a company must divulge information such as minimum capital requirements, audited earnings reports, and financial reports.Not all exchanges are created equally, with some outperforming other exchanges significantly. The most high-profile exchanges to date include the New York Stock Exchange (NYSE), the Tokyo Stock Exchange (TSE), the London Stock Exchange (LSE), and the Nasdaq. Outside of trading, a stock exchange may be used by companies aiming to raise capital, this is most commonly seen in the form of initial public offerings (IPOs).Exchanges can now handle other asset classes, given the rise of cryptocurrencies as a more popularized form of trading. An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectively relevant with real-time pricing.Depending upon where you reside, an exchange may be referred to as a bourse or a share exchange while, as a whole, exchanges are present within the majority of countries. Who is Listed on an Exchange?As trading continues to transition more to electronic exchanges, transactions become more dispersed through varying exchanges. This in turn has caused a surge in the implementation of trading algorithms and high-frequency trading applications. In order for a company to be listed on a stock exchange for example, a company must divulge information such as minimum capital requirements, audited earnings reports, and financial reports.Not all exchanges are created equally, with some outperforming other exchanges significantly. The most high-profile exchanges to date include the New York Stock Exchange (NYSE), the Tokyo Stock Exchange (TSE), the London Stock Exchange (LSE), and the Nasdaq. Outside of trading, a stock exchange may be used by companies aiming to raise capital, this is most commonly seen in the form of initial public offerings (IPOs).Exchanges can now handle other asset classes, given the rise of cryptocurrencies as a more popularized form of trading. Read this Term Commission over accusations that the company understated the number of delinquent loans backing subprime mortgage securities.

But what exactly did the bank do to warrant these enormous settlements? Highlights of internal documents revealed in legal proceedings show a frightening level of negligence.

For instance, one due-diligence email read, "The real issue is that the loan requests do not make sense." It cited an example of one borrower listing his salary as $12,ooo a month while working at a tarot reading parlour. Another email pointed out that "deteriorating appraisal quality is very flagrant."

Not only did higher-ups pay no heed to these concerns, the situation was made light of by Pamela Barrow, top due diligence executive. Some choice quotes of hers mocking home buyers include, "First payment defaulting straw buyin' house-swappin first time wanna be home buyers," and, "We should call all their mommas." She continues, "Betcha that would get some of them good old boys to pay that house bill."

In direct response to an email from a due-diligence officer, Bernard Zahn, where he voiced concern that the problem was very widespread, she wrote, "Good find on the fraud :)" but continued with a frank, "Unfortunately, I don't think we will be able to utilize you or any other third party individual in the valuation department any longer."

To paint readers a clearer picture we’ve put together a timeline of Morgan Stanley’s role in the years leading to the subprime mortgage crisis.

For reference, New Century Financial Corporation was a real estate investment trust that originated mortgage loans in the United States. As of January 1, 2007, New Century was the second-largest subprime mortgage lender in the US.

This marks the fourth time over the past five years that the company has been forced to reduce earnings in the weeks following an earnings announcement as the company has now cut 2014 income from continuing operations by $2.7 billion due to the increase in legal reserves related to mortgages.